New Plan Cuts Health Care Costs in Half

By Spencer, Peter L. | Consumers' Research Magazine, October 1993 | Go to article overview

New Plan Cuts Health Care Costs in Half


Spencer, Peter L., Consumers' Research Magazine


People working at Dominion Resources Inc., a utility holding company in Richmond, Virginia, have a real choice concerning health care--one that puts cash in their pockets and suggests a solution for the nation's current problems with health insurance spending.

Dominion employees can choose to enroll in a medical insurance plan with a deductible of $1,500 a year for individuals and $3,000 a year for family coverage. About 75% of the insured employees opt for the high-deductible plan over the company's two low-deductible offerings. They get to keep the resulting premium savings not used towards the deductible. They choose whatever physician they want, routine tests or checkups--just as with the conventional low-deductible insurance. However, the incentive to watch their own out-of-pocket spending on routine medical expenses makes the difference, both for the employees and the employer.

Although it's too early for definitive conclusions, the four-year old program shows impressive results:

* Since 1989, health spending at Dominion has increased by less than 1% a year.

* In 1990, the company began offering employees "wellness incentives" of up to $600 per year (which could be credited towards premiums) if they can be rated "low risk" according to five risk factors--blood pressure, weight, smoking status, cholesterol count, and seatbelt use.

* In 1992, employee medical claims dropped by about half and the company, which self-insures, underspent its health budget by 31%, saving $135,000 from what health consultants said they would spend, including the wellness incentives. Dominion distributed half these savings to any employee who did not spend more than the deductible; each received an $800 check for the year.

* Now, the company expects to reduce its premiums further because of the savings in administrative costs from the drop in claims filed by employees.

Why all these savings? Through high-deductible options and its payout of savings, Dominion makes its employees aware that health care benefits are part of the company's compensation, along with wages. Any saving in health spending, by the company or employee, means additional money that can go towards wages--extra money for other expenses or savings, if medical care is not needed. As Dominion's experience demonstrates, the approach is popular and reduces costs.

It also runs counter to prevailing discussion about health reform, which tends to focus on mandated benefits packages, security for all, etc.--reflecting the view that health benefits are an entitlement, not compensation. Suggested plans following this line of thinking will intensify the forces that have been inflating health care expenses and actually could make matters worse for consumers. Mandates requiring coverage for low-end care, for example, would reduce the financial control of the patient and increase oversight of physician-decisions by those spending most of the money--insurers, health maintenance organizations (HMOs), and the government.

As frequently pointed out in CR, problems with spiraling health care spending occur because the vast majority of medical bills are paid by the government and/or insurers. This third-party payment system makes both providers and consumers oblivious of price, pushing demand and costs to ever-higher levels (see "How to Solve the Health Care Crisis," CR, March 1992).

Conventional, low-deductible insurance and HMO coverage--which pay for much of the routine, small medical bills people generate encourage employees to seek medical care, even when it isn't necessary. Such traditional medical plans create a "use it or lose it" situation for those covered. In any given year, for instance, what otherwise would be your income goes to health premiums. If you don't use, your health plan, that money is gone.

This all adds to tremendous demand for health care, increased premiums, inefficiencies in the system, and more third-party oversight and cost-cutting decisions. …

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